The typical vision is something along the lines of lowering costs, raising some liquid capital and simplifying the workload. Downsizing for many Canadians involves moving to a smaller home, shifting to one car or going car-less, reducing high-maintenance assets like boats, cottages, equipment and other fun machines, cancelling expensive memberships and generally having fewer things to stress about with more money in the bank.
It’s a grand effort to downsize, and can take years. When done thoughtfully, it can shore up retirement savings and ease pressure on one’s budget. If rushed or the plan’s half-baked though, downsizers can easily lose money. Don’t let this be you.
Start with the numbers and begin visualizing the required lifestyle changes
A really good financial adviser can help you work through every nook and cranny of your financial picture, and how it would be impacted by downsizing.
They’ll examine the costs of downsizing, net proceeds from what you plan to sell (sale price minus transaction fees minus debt) and pinpoint how your monthly costs might change once you’re through the process. For example, there may not be a mortgage or car payment once you downsize, but there could be rent or maintenance fees on the new place you move to. That might translate into saving a few thousand dollars per month, as an example. They’ll take these numbers and demonstrate the impact to your retirement savings portfolio.
Good advisers can also reverse engineer the calculation and flat out tell you how much you need to raise from your downsize efforts to make your portfolio last your lifetime. For example, they might say you’ll need another $250,000 in your portfolio earning at least four per cent return after fees to produce another $1,000 a month in income in perpetuity. As you run financial scenarios, you’ll know what’s worth pursuing and what’s not.
Preparing for the costs of downsizing
The full gamut of fees are often underestimated by downsizers. The moment you start thinking about downsizing, start a list of costs and penalties you expect to get dinged with.
It would include costs for lawyers, taxes, registrations, appraisals for all kinds of assets including jewelry, realtor commissions, brokers (also applicable when selling a business), mortgage break penalties, bridge loan costs, interest payments, cancellation and transfer fees. You will uncover more costs the deeper you look.
A tax accountant should be brought in to help assess potential tax implications of selling investments like income-producing real estate or capital gains/losses related to selling securities.
If the costs to downsize appear overwhelming, it might be worth taking a pause to see if it’s worth it, or potentially stagger the downsize out.
Timing is everything, and it’s also evolving as adult children return home
Is now a good time in the real estate market to sell? Certainly that’s not the case everywhere in Canada. How about selling vehicles or other expensive items you own? Is it a good time to sell, or should you wait?
And with the cost-of-living being so terribly expensive and the job market on the fritz, will your adult children be returning to the nest? When they do, will they need money? If capitalizing on the timing of your downsize is critical to you getting you the most money, or if supporting your adult kids as they return home is a priority, downsizing might have to wait. Or, at a minimum, your vision for how your downsize needs to go might have to shift.
Reducing all the ‘stuff’ can start now
Decluttering. Minimalizing. Purging. Selling and donating items.
Downsizing isn’t just about shrinking homes and cars. It applies to the gazillion things you might be storing in your basement or garage, too. Chances are, a lot of these items are worth something and could be sold. Dining chairs, exercise bikes, tea sets, book shelves, play centres for kids and more.
Having recently helped my father downsize, starting the purging process about a year before selling his home made the sale easier. It also resulted in the home showing very nicely and a quick sale. When he relocated to his new place about half the size, only the best of the best of his remaining things were moved, and those items fit the smaller space properly. Start reducing now.
You’re not too old (or too young) to downsize
It’s a myth that only retirees (or the soon-to-be retired) should downsize. In my work, I’m seeing more and more people downsizing much earlier. In a lot of cases, their lifestyles just kind of crept up — fancier cars, bigger homes, membership clubs, etc. — earning more money and having all the things, but leaving them with an empty wallet and emotionally drained.
Downsizing might be right for you much earlier in life, especially if it gets your finances and emotional well-being back on track. We’re seeing this trend on social media with posts about minimalism, tiny houses and city dwellers moving to less expensive and highly remote locations. Checking in with a financial adviser, and also a coach or therapist, about the idea of simplifying life and money is a great place to start.
Downsizing is more than a financial strategy. It’s a lifestyle shift that, when done with intention and planning, can free up money, eliminate debt, reduce stress and open the door to a more flexible and fulfilling life.
